What is Mutual Fund Overleap?
Mutual fund overlap is a term where multiple mutual funds in an investor’s portfolio hold similar stocks or securities.
This overlap can arise because different mutual funds often invest in the same or similar companies or asset classes.
The overlap status in Mutual fund schemes is measured by the percentage of shared holdings between two or more funds.
How can I find out if my portfolio overlaps?
To find out if your mutual fund portfolio has overlap, you can use the Portfolio Overlap tool provided by The Fundoo. This tool allows you to compare the underlying portfolios of two mutual funds and identify the securities that are common between them.
It also computes the extent to which the overlap occurs Alternatively, you can compare the holdings of your mutual funds manually. Portfolio overlap can be checked by comparing the top holdings, sector allocation, and market capitalization of your different mutual fund holdings.
You can also look at a statistical measure called “R-squared (R2),” or the “coefficient of determination,” which will tell you a particular investment’s correlation with (similarity to) a given benchmark.
Best Mutual fund overlap tool:-
As discussed above there are so many tools available to check the mutual fund overlap in your mutual fund holding. some of the tools are as under:-
(i) Advisorkhoj
(ii) Primeinvestor
(iii) Fundpicker
What are the risks of mutual fund overlap?
Mutual fund overlap can have some adverse effects on your overall mutual fund portfolio. It reduces the benefits of diversification, as overlapping holdings increase the concentration of investments in specific stocks or sectors.
This can lead to higher volatility and increased risk of losses in a down market. Additionally, it can result in higher transaction costs and tax liabilities
To minimize the risks of mutual fund overlap, it is important to review the holdings in the funds you own regularly.
You can also use the Portfolio Overlap tool, available online to compare your portfolios of two mutual funds and identify the stocks that are common between your mutual fund schemes.
These tools can help you make informed decisions about your investments and avoid excessive overlap.
How to reduce mutual fund overlap?
To reduce mutual fund overlap, you can consider the following strategies:
Analyze your holdings: Investing in too many funds may lead to high mutual fund overlap. Review the holdings in the funds you own regularly and identify the securities that are common between them.
Shuffle your portfolio: After identifying overlapping in your mutual fund portfolio, try to shuffle your holdings. This can help you reduce the concentration of investments in specific stocks or sectors.
Exit underperformers: While analyzing your mutual fund holdings, you can segregate the underperformers and exit them. This can help you reduce the overlap and improve your portfolio returns.
Invest across categories and fund houses: Investing in mutual funds across different categories and fund houses can help you achieve diversification and reduce the risk of overlap.
May also Check
Can you recommend some low-overlap mutual funds?
Here are some strategies to consider when looking for low-overlap mutual funds:
Diversify your investments: Investing in mutual funds across different categories and fund houses can help you achieve diversification and reduce the risk of overlap.
Opt for funds with different investment styles: Funds with different investment styles, such as value, growth, or dividend strategies, can help you reduce overlap.
Invest in large-cap, mid-cap, and small-cap funds: Investing in funds that focus on different company sizes can help you avoid excessive overlap.
Consider index funds: Index funds are passively managed funds that track a market index. They tend to have lower expense ratios and lower turnover rates, which can help reduce overlap.
Here are some mutual funds that have low overlap:
Mirae Asset Large Cap Fund: This fund invests in large-cap stocks and has a low overlap with other large-cap funds.
Axis Midcap Fund: This fund invests in mid-cap stocks and has a low overlap with other mid-cap funds.
SBI Small Cap Fund: This fund invests in small-cap stocks and has a low overlap with other small-cap funds.